AFB Direct and Indirect Method

Why is a cash flow statement importance?

• Short-term financial planning- preparing a cash budget

• Measurement of liquidity

• Dividend decisions

• Future guidance

• Benchmarking

  • Change in the net assets of the business

  • Change in the financial structure

  • Financing of expansion

  • Utilisation of finance obtained by the enterprise

  • Impact of investing and financing activities on the cash balance of the enterprise

What are the 3 categories for a statement of cash flows?

• Cash flows from operating activities

  • Cash from everyday operations, ensuring there is enough cash to pay for interest, tax and dividends

• Cash flows from investing activities

  • Cash spent on infrastructure, creating capacity: land, buildings, vehicles, equipment ; includes cash from sales of such assets

• Cash flows from financing activities

  • Cash obtained from issue of shares and loans and repayment of loans; cash spent on buying back shares and repaying loans

How can a cash flow statement be arranged to present 3 major categories of cash inflows/outflows

How can we reconcile the cash status

What is the Direct method?

• The direct method is used within your own company where you already have available the cash receipt and payment details

  • Simple re-organisation of the inflows and outflows under the 3 categories

How can we reorganise the Direct Method?

What is an example of this practice method?

How can I practice this?

What is the Indirect Method?

• The indirect method is used where you are looking at another company’s most recent income statement as well as the opening and closing statements of financial position

  • Uses profit as a starting point and works out the cash summary for each of the 3 categories of cash flow activities

How can we show the indirect method